Refinancing for Home Improvements

Refinancing Home Improvements

Many home owners seek renovation or reconstruction loan when they want to embark on a home remodeling project. When doing this, they go for a mortgage that reflects the estimated post-remodel value of the property. Most lenders offer mortgages up to the tune of 85% value of the remodeled home.

Sourcing for the funds

Instead of refinancing their mortgage, there are different options homeowners can use to pay for home renovation. With a little proper research, lenders will get to find the different borrowing options available to them. It may be helpful to gather funds from multiple sources; however, it pays to consult a lending professional before making any major financial commitments.

Using your home as collateral

Homeowners can get loans from HELOCs and Home Equity using their home as collateral. Since the value of landed properties is on the rise, the amount of available loans has also increased.

If the owners have a pending first mortgage lower than the value of the home, they can take a second mortgage or a home equity loan.

Home Equity loans come in a very bulky amount, though with a closing cost, and fixed interest rate, which may be tax deductible. Repayment commences immediately on a monthly basis, and must run within a short period.

On the other hand, HELOC loans are more flexible. After a line of credit is established and a HELOC agreement is signed with a specified maximum credit limit, homeowners can borrow money at any time during the project. Closing costs are accessed, and a period is also set for repayment. The interest however, is variable, and the amount payable per month may also fluctuate depending on prime rate. Just like home equity, the interest may be tax deductible, so do well to consult a tax consultant.

Most times, HELOC credit limit is capped at 80% percent of the appraised value of the home minus the homeowners’ pending mortgage debts.

Borrowing from your 401 (k)

Although using part of your 401(k) tax-deferred retirement plan sounds like such a juicy idea, it comes with some conditions which you can escape by borrowing the money. Withdrawing money from your 401(k) attracts 10% penalty and tax, while on the other hand, borrowing from it and paying back on time saves you all those conditions.

The good thing about borrowing money from your 401(k) is that it is easily accessible, and comes with low interest rate most times capped at prime rate plus 1%. Also, the interest paid goes back into your 401(k); hence you save even more for the future. Note however that some 401(k) plans do not allow borrowing. Also, consider the fact that as an investment, the 401(k) account may have yielded good interest, and shouldn’t be disrupted; and you get to pay tax on it twice: the after-tax wages used for repaying the loan, and the tax you’ll pay when withdrawing the 401(k) on retirement.

As long as the employee remain with the employer, they have a period of 5 years to repay their 401(k) loans within five years and 60 installments, but if they must pay back in 60 days if they leave the employer.

Custom credit lines and personal loans

People who qualify for this may get a custom credit line of up to $25,000. This loan doesn’t require collateral, and the price depends on the profile of the customer, and their current Citi relationship. Interest rate is capped at prime rate, and there’s no closing cost. Each month, borrowers are to pay part of the outstanding balance plus applicable fees and interest.

Qualified borrowers may get unsecured personal loans of up to $50,000. The loans require no collateral, the interest rate is fixed, and repayment period is also fixed between 12 and 60 months of equal monthly installments.

Other available financing options include

The Federal Housing Administration (FHA) Title 1: This program allows qualified borrowers to get loans of up to $25,000 from approved banks and lenders for home improvements.

Getting loans through contractors: Homeowner can get loans through their contractors, who may have developed a good working relationship with lenders. However, it is important to check the terms and interest rates before choosing this option.

Security-backed lines of credit: These lines of credit are applicable to homeowners who have good investments of maybe $200,000 and above. Depending on the type and amount of investment, the available credit from these platforms is higher than the ones obtained from HOLOC.

The interest rates are determined by the International London Interbank Offered Rate, and are often lower than what is obtainable in other types of credit; also closing and appraisal fee may not be required. You may also need to consult a tax consultant, as the tax deductibility varies.